Keynote Address by Commissioner O'Malia at Tabb Forum Event Regarding Evolving Market Structure (with Lofchie Comment)

CFTC Commissioner Scott D. O'Malia delivered the keynote address at the Tabb Forum event, focusing on recent market structure changes. Commissioner O'Malia focused his remarks on three key topics, high-frequency trading/algorithmic trading, cross-border issues, and the Path Forward Guidance, that have been impacted by the transformation of market structure, and the ways in which the CFTC can fix the negative impacts of its rules.

Commissioner O'Malia noted that Michael Lewis' recent book Flash Boys stirred up debate about HFT and market structure. Commissioner O'Malia disagreed with Mr. Lewis' assessment that markets are "rigged," and stated that the next Technology Advisory Committee meeting will have a panel to address and respond to the charges in Lewis' book from a derivatives perspective. However, Commissioner O'Malia does not believe the CFTC has the technological capability to oversee fast and increasingly complex derivatives markets. He stated that he is frustrated with the lack of a strategic technology plan, so instead he plans to open a forum on the CFTC website where interested third parties can submit proposals or ideas about how the CFTC should develop such a market surveillance system.

Cross-Border Framework

Commissioner O'Malia stressed that the CFTC and non-U.S. regulators must undertake serious efforts to create a flexible, outcomes-based cross-border framework. Without doing so, Commissioner O'Malia explained that regulators run the risk of developing micro-solutions that highlight cross-border differences instead of similarities. Additionally, Commissioner O'Malia stated that the since the implementation of substituted compliance determinations from December 2013 there has been an increase of fragmented liquidity in the swaps market. He noted a recent news article that explained non-U.S. persons are refusing to trade with U.S. persons, and instead insisting on trading with U.S. banks' non-guaranteed affiliates in order to avoid CFTC regulations, which leads to U.S. persons not being able to directly access non-U.S. pools of liquidity.

Commissioner O'Malia stated that he sent a letter to European Commissioner for Internal Market and Services, Michel Barnier, asking him to move forward with U.S. equivalence and central counterparties ("CCP") recognition under EMIR. Commissioner O'Malia explained that he is concerned that further delaying the equivalence decision could impede the European Securities Market Authority from recognizing U.S. CCPs by the June 15th deadline.

CFTC Regulatory Path Forward

Before moving forward with new issues that impact market structure, Commissioner O'Malia stated that the CFTC must spend time fixing unworkable rules in order to alleviate negative impact on the markets. One of the ways that the CFTC is attempting to alleviate some of the negative impact is the recent no-action relief for package trades. This relief, Commissioner O'Malia states "strikes an appropriate balance between promoting trading on SEFs and the need to preserve orderly markets." Commissioner O'Malia explained that the CFTC needs to fix "the guidance and every other rule that has cast the regulatory net too broadly or resulted in an outcome that has missed the mark."

Lofchie Comment: Commissioner O'Malia highlights the challenges facing the incoming CFTC Chairman, who will have to clean up the mess of rules that were carelessly and hastily adopted by the Commission under his predecessor.

See: Commissioner O'Malia Speech.